Case Study 4: Corporate Valuation
Case 51: Brown-Forman Distillers Corporation

1. Why is Brown Forman considering buying Southern Comfort? In your answer consider the strategic motives of Brown and the arguments in favour of and against the acquisition.

Producing and selling high-quality products is the company’s marketing philosophy. Although Brown-Forman was the fifth-largest distiller in the United States, it spent a lot of money in advertising support in order to build best brands in the world. In a while, the whiskey market was in a depression. Brown- Forman faced a big challenge to overcome this period. In order to expand its product lines, Brown-Forman chose several of products which has fast growth in the alcohol beverage market. So the company can expand its product lines. In addition, during the 1978 to 1980 period, the company invested $86 million in advertising and promotion, $39 million in barreled-whiskey inventory and $19 million in fresh plant and equipment. The company was aware of that the foreign market also was important for the later growth of company.
Advantages: The Southern Comfort can provide a variety of products to customers. After this acquisition, the earning per share and share value of stakeholders value will increase. The profit/sales ratio is high. So the company can make more profits. The average assets/sales ratio also is high. Therefore, the company can make more earnings and produce high-quality brands by using the lowest costs.

Disadvantages: The hurdle rate of Brown-Forman is so high that it is difficult to make a decision for the company. The company has to decrease the hurdle rate. Otherwise, it will lose Southern Comfort. The company invests much money in the advertisement to sell the Southern Comfort products. However, the company will lose the liquidity of